Sunday, May 23, 2010

What is really wrong with socialism?

In his famous two essays on the anarchist model of law and defense, Robert Murphy gives a good summary of libertarian critique of socialism while also explaining not just the advantage but the necessity of capitalism:

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The traditional opponents of socialism argued that it had insufficient incentives for the average worker; without tying pay to performance, people would shirk and output would be far lower than in a capitalist economy. Only if a new “Socialist Man” evolved, who enjoyed working for his comrades as much as for himself, could a socialist system succeed.
Although valid, this criticism misses the essence of the problem. It took Ludwig von Mises to explain, in a 1920 paper, the true flaw with socialism: Without market prices for the means of production, government planners cannot engage in economic calculation, and so literally have no idea if they are using society’s resources efficiently. Consequently, socialism suffers not only from a problem of incentives, but also from a problem of knowledge. To match the performance of a market economy, socialist planners would not need to be merely angels, committed to the commonweal—they would also need to be gods, capable of superhuman calculations.
At any time, there is only a limited supply of labor, raw materials, and capital resources that can be combined in various ways to create output goods. A primary function of an economic system is to determine which goods should be produced, in what quantities and in what manner, from these limited resources. The market economy solves this problem through the institution of private property, which implies free enterprise and freely floating prices.
The owners of labor, capital, and natural resources—the “means of production”—are free to sell their property to the highest bidder. The entrepreneurs are free to produce and sell whatever goods they wish. The ultimate test of profit and loss imposes order on this seeming chaos: If a producer consistently spends more on his inputs than he earns from selling his output, he will go bankrupt and no longer have any influence on the manner in which society’s resources are used.
On the other hand, the successful producer creates value for consumers, by purchasing resources at a certain price and transforming them into goods that fetch a higher price. In the market economy, such behavior is rewarded with profits, which allow the producer in question to have a greater say in the use of society’s scarce resources.

None of this is true in the socialist state. Even if they truly intended the happiness of their subjects, the government planners would squander the resources at their disposal. With no test of profit and loss, the planners would have no feedback and would thus be operating in the dark. A decision to produce more shoes and fewer shirts, or vice versa, would be largely arbitrary. Furthermore, the individuals to ultimately decide the fate of society’s resources would be selected through the political process, not through the meritocracy of the market. [Ad kan.]

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Sometimes people blame the failure of socialism in Russia on the dictators. But what did the violation of human rights have to do with the economy (besides the fact that they had to force people into socialism, just like today in the US people are forced into being taxed, so that US auto industry can be bailed out)? Killing off the intelligentsia did not cause the great famines of 1920’s and 30’s. Collectivization of the farms did. Suppressing freedom of speech was terrible, but it wasn’t the reason why the Soviet Union had to import grain from Canada after the Virgin Lands disaster (and other similar campaigns).

One adviser to Khrushchev was Trofim Lysenko, who promised greatly increased production with minimal investment. Such schemes were attractive to Khrushchev, who ordered them implemented. Lysenko managed to maintain his influence under Khrushchev despite repeated failures; as each proposal failed, he advocated another. Lysenko's influence greatly retarded the development of genetic science in the Soviet Union. In 1959, Khrushchev announced a goal of overtaking the United States in production of milk, meat, and butter. Local officials, with Khrushchev's encouragement, made unrealistic pledges of production. These goals were met by forcing farmers to slaughter their breeding herds and by purchasing meat at state stores, then reselling it back to the government, artificially increasing recorded production.

In June 1962, food prices were raised, particularly on meat and butter (by 25-30%). This caused public discontent. In the southern Russian city of Novocherkassk (Rostov Region) this discontent escalated to a strike and a revolt against the authorities. The revolt was put down by the military who opened fire on unarmed demonstrators. According to Soviet official accounts, 22 people were killed and 87 wounded. In addition, 116 demonstrators were convicted of involvement and seven of them executed. Information about the revolt and the massacre was completely suppressed in the USSR, but spread through Samizdat and damaged Khrushchev's reputation in the West.

Drought struck the Soviet Union in 1963; the harvest of 107,500,000 short tons (97,500,000 t) of grain was down from a peak of 134,700,000 short tons (122,200,000 t) in 1958. The shortages resulted in bread lines, a fact at first kept from Khrushchev. Reluctant to purchase food in the West, but faced with the alternative of widespread hunger, Khrushchev exhausted the nation's hard currency reserves and expended part of its gold stockpile in the purchase of grain and other foodstuffs.

13 comments:

Mor
said...

Oh, now I get it. In hachi nami. But socializing healthcare and providing welfare and social security are not shown to be bad according to this model. Unless I am missing something. This just says that it is silly for the government to be in control of all (or many) (or any) of the industries. I think that Obama would agree. Besides, isn't that communism? Socializing healthcare may just be a necessary evil (necessary from a moral perspective and evil from an economic perspective). And social security just has to do with the question of who is better at giving charity? Government or private charities? It has nothing to do with Mises' idea. Actually, a lot of the medieval Muslim states had social security systems in place. It is just a new idea for barbaric Europeans.

I think the argument is that just like it’s a bad idea for the government to have monopoly in shoe business or agriculture, it’s a bad idea for the government to have monopoly in education, medicine or charity.

Obama’s goal is to spread the wealth — to decrease inequality between classes of people. But, as we see from the presented model, that is a bad idea. We want there to be inequality. Since not everyone is a successful interpreneur, we don’t want everyone to have the same amount of money to have to do business with. We want Steve Jobs to have more money than a produce of an inferior product, because Steve Jobs makes a better product (as evidenced by the fact that people buy his product more than his competitor’s which gives him the money to produce more products; so, in essence, the public is voting for him to keep doing what he’s been doing).

My point is that you can not compare education to some normal industry like shoemaking. In fact, that is why teachers always have low salaries. They are always petitioning for higher salaries and complaining that their salaries indicate that their jobs are not valued by society. I had forgotten about this, but several months ago I was randomly looking through a book called Economic Public Policy and Jewish Law, by Aaron Levine. Okay, I can't find where he says it. Teachers do not turn out products that can be sold for a profit. Neither do doctors. Charity organizations do the exact opposite - they must be not for profit. Comparing these industries to entrepreneurship seems absurd. It is like saying that because you can make lemonade from lemons you can make deskade from desks. Or whatever. Just wait to hear how people in yimot hamashioch sniff over 21st century values. The Muslims were using paper before most Europeans could write.

Salaries are not only an indication of value, but also of supply. Remember, supply and demand? Bread is in high demand, but it’s also in high supply, which is why its cost is lower than diamonds, which may be in lower (or equal) demand, but they are also in a much more lower supply.

I.e., if a particular teacher demands high salary, he can be easily replaced with another teacher who can work for a lower salary. On the other hand, a baseball player is much more difficult to replace. But the fact that baseball players are paid more is lav davka indicative of any “value” that society assigns to them.

Education is not different at all in this way. All factors of the market obey the laws of supply and demand.

Garbage collectors get paid more than teachers, because presumably fewer people want to collect garbage.

Teachers do not turn out products that can be sold for a profit. Neither do doctors.

That is such a ridiculous statement. Incredibly. Teachers don’t turn out any products. They provide services that are valued by individuals who are willing to pay for them (my mother paid for my tutors in Russia and for my grandmother’s doctors in Israel). So do Internet service providers, or people who check for kashrus of food, or people who shine shoes, or people who cut hair. There is absolutely no difference in terms of how these things work in a free-market economy.

Okay, so that was just me being confused. I confabulated that thing about salaries - the book talks about s and d reasons for teachers having low salaries. Pretend that never happened.But that is not the point. You still have not responded to the main point, which is that Mises talks about industries where you have raw material, entrepreneurs, and products. Education medicine, and most especially charity fall completely outside of his theory.

I guess I am not just saying this about education, medicine, and charity. I am saying this about any service - as opposed to business or craft. It actually makes a lot of sense the more that I think of it. The government provides garbage collection, sewage control, water filtration/conduction, and education. Those are all services (the actual water is free). With the exception of education, they're all going pretty well. But maybe that is because of dumb American culture. After all, Russian public education is excellent.Services are not included in Mises' theory. If you are already providing all of these things, you might as well provide medicine also. It is also a service. Whether or not it works well will, again, probably depend on the culture. Of course you can still make the initial argument in the post. But Mises is out.

Why do you assume Mises talks about those industries only? How about service industries such as banking, Internet, TV, cell phones (the connection, not the gadgets), hair cutting, mechanic shops, babysitting, shaddchanus, advertisement (a huge industry), travel (again, not producing the taxis or airplanes themselves, but the service provided), kashrus certification, etc., etc., etc.

All those things would be much worse if provided by the government for exact same reasons that Mises listed. In order to achieve maximization of excellence in any service, you need competition between multiple providers. The market establishes prices, showing entrepreneurs how much in demand (and supply) a particular business is; competition drives the prices down and quality up.

Just like the government has no idea what kind of mp3 players the public needs, it has no idea what kind of TV service the public needs — and nobody has any way of knowing without the market assigning values through people choosing to send checks to particular companies providing particular services and not to others.

I don’t buy the “if you’re already providing those service” argument, because a) I don’t believe the government should be providing any services except law and protection, b) it’s similar to saying “if you’re already eating pork, might as well eat cheeseburgers too”. According to e, the Rebbe was against such an approach (that was one of his meta-scruples).

How do you know that garbage collection and other services (or, for that matter, police, army, the courts, the law-making, etc.) are doing well, without anything to compare them to? I know US postal service sucks, because I can compare it to private postal service. Why wouldn’t private garbage collection agencies be feasible?

Soviet education is an enigma for me. I am trying to figure out what contributed to its excellence. I think it has more to do with Russian culture, but I admit to being puzzled by it. A similar service, medicine, was much-much worse, despite the level of doctors being comparable.

Anyway, the main thesis of your argument — that Mises’s logic doesn’t apply to services — is wrong.

Ok. Fine. I reread it.I was wrong. So I can be modeh that the government providing services is not the most economically efficient way for things to happen. However, to me, there is always this problem of neglecting the poor. That is why there needs to be social security and things like that. We have already gone in circles with the charity argument, so I don't want to start it again. I just want to share an excerpt of a haskamah on the frum economics book

I was impressed by...the author's knowledge of both economics and halakhik economic and social norms...in particular his convincing demonstration of the role of imitatio Dei in modifying the imperatives of efficiency and profit - R. Ahron SoloveichikNormally I don't read economics books for fun, but maybe I will read this one...